(This response can be published and attributed to Mail Users Association)

Transcription

1 OFCOM S REVIEW OF THE REGULATION OF ROYAL MAIL Response from Mail Users Association. (This response can be published and attributed to Mail Users Association) S1 EXECUTIVE SUMMARY 1.1 MUA is the UK's only independent association of business users concerned wholly with commercially related postal matters. Its members are drawn from a wide range of business interests including direct mail, banking and finance, communications, publishing and postal related industries. Collectively, it is estimated MUA members generate more than 10% of annual postal traffic in the UK, and represent a category of large volume mailers otherwise referred to as Super Users. 1.2 MUA members believe the development of competition in the marketplace has brought considerable benefit to the postal industry as a whole and represents an important and necessary transformation from the days of a state postal monopoly. 1.3 Effective, efficient and improving competition is, MUA believes, vital to supporting the use of mail as a communication medium, against a background of overall decline in postal volumes and increasing use of alternative forms of communication between businesses and their customers. MUA therefore welcomes the opportunity to respond to Ofcom s Review of the Regulation of Royal Mail. 1.4 To form this response, MUA members were given a questionnaire which included the questions asked by Ofcom in the Review and further questions seeking to understand some of the views, issues and concerns of members in relation to the questions asked by Ofcom. 1.5 Where the question asked members to rate their opinion on a 1 to 10 scale, the score quoted in this response is the median score. For most of the questions, this response also includes typical comments made by members in completing the questionnaire. 1.6 A summary of the MUA members views is given below, with fuller responses in the following sections. S2. Ofcom Question 1: Do you agree with Ofcom's view that there is a need to consider the effectiveness of the existing regulatory structure? 2.1 The overwhelming majority of members believed that there is a need for Ofcom to consider the effectiveness of Royal Mail s existing regulatory structure. 2.2 MUA members consistently consider that the existing regulatory regime does not provide sufficient incentive for Royal Mail to improve efficiency, or sufficient constraint on its behaviours, its exercise of market power and its terms and conditions, and does not enable effective competition. S3. Ofcom Question 2: To what extent do you consider Royal Mail's pricing and nonpricing behaviour is constrained by other postal operators and additional factors such as e-substitution? 3.1 MUA members generally believe other postal operators activities and additional factors such as e-substitution act as a constraint on Royal Mail s pricing and non-pricing behaviour to only some or a small extent. 1

2 3.2 There was not believed to be any constraint from other operators on Royal Mail s pricing or non-pricing behaviour in relation to mail, with the near-absence of competition in final delivery meaning Royal Mail controlled the prices and terms for downstream access and, as retail competition very largely had to adopt access pricing and terms, there was also lack of constraint in the retail market. 3.3 Royal Mail s pricing behaviour was a particular concern. 3.4 E-substitution and other external factors were seen by some members as being a constraint on Royal Mail s behaviours to a small extent, but members views were mixed as to whether there was much constraint in practice. 3.5 As a result, MUA members were unanimous that further regulatory constraint was needed on both Royal Mail s pricing and non-pricing behaviour, and for both Retail and Access. 3.6 In relation to pricing, members comments indicated a desire to see limits to the scale and frequency of price increases, with clear linkage between Retail and Access prices. 3.7 For non-price terms, the issue of equivalence between Retail and Access is a common concern of members as there is a consistent view that service specifications, additional features and pricing options / promotions offered by Royal Mail to its Retail and Access customers are not sufficiently similar. 3.8 A large majority of MUA members believe that the existing scope of Access regulation should be extended, to include (for example) items above the current level of 750g (i.e. to include Packets ), extraction of items at Outward Mail Centres and a wider range of service specifications and features. S4. Ofcom Question 3: To what extent do the competitive constraints faced by Royal Mail vary by different types of mail, e.g. for letter services, between advertising mail, transactional mail and publishing mail; and for parcel services, between single-piece and bulk parcels? 4.1 Differences in competitive constraints are seen between different types of mail (but from external factors such as e-substitution, not direct competition from other operators), with advertising (and publishing mail) seen as having greater competitive constraint than transactional mail. However, the degree of such constraints is not seen as being great. 4.2 With parcels, MUA members see a high level of competitive constraint. S5. Ofcom Question 4: Do you consider that Royal Mail faces appropriate incentives to deliver efficiency improvements? 5.1 The almost unanimous view of MUA is that Royal Mail faces little or no incentives to deliver efficiency improvements, with a need seen for price controls, cost targets and greater competition as means to spur efficiency improvement. S6. Ofcom Question 5: Do you consider that there are any areas of existing controls on Royal Mail activity where there is the potential for deregulation? 6.1 MUA members generally did not know if there was potential for deregulation of Royal Mail, though a quarter said there were no areas for potential de-regulation on Royal Mail. 2

3 S7. Ofcom Question 6: Do you have any further comments or views about Ofcom's regulation of Royal Mail? 7.1 Members responses indicated a view that the existing regulatory regime was no longer fit for purpose, with Royal Mail s behaviour being monopolistic and a need for regulatory action in the absence of competitive constraints. 7.2 Members were also asked to score the extent to which the agreed or disagreed with statements about Royal Mail s behaviour and attitude to major customers. Scores were varied on several of the statements, but where there was good consistency the scores indicated clear dissatisfaction with Royal Mail in failing to have a positive stance towards customers. 3

4 1. EFFECTIVENESS OF EXISTING REGULATORY STRUCTURE Ofcom Question 1: Do you agree with Ofcom's view that there is a need to consider the effectiveness of the existing regulatory structure? 1.1 The overwhelming majority of members surveyed stated they strongly agreed or agreed there is a need for the Regulator to consider the effectiveness of Royal Mail s existing regulatory structure. 1.2 MUA members were also asked to express their agreement or otherwise with the following questions relating to the existing regulatory regime, using a scale of 1 Strongly disagree to 10 -Strongly agree: The existing regulatory structure provides sufficient incentive for Royal Mail to improve efficiency - Median score: 2 Respondents almost unanimously disagreed that the existing regulatory structure provided sufficient incentive for Royal Mail to drive through efficiency improvements The existing regulatory structure provides sufficient constraint on Royal Mail's pricing freedom - Median score: 2 Again, respondents almost unanimously disagreed that existing regulatory structure provides sufficient constraints on Royal Mail s pricing freedom, with over a large majority stating they strongly disagree or disagree The existing regulatory structure enables the development of sufficient, effective competition - Median score: 3 The majority disagreed that existing regulatory structure provides sufficient constraints on Royal Mail s pricing freedom although a quarter agreed The existing regulatory structure provides sufficient encouragement for Royal Mail to offer high quality services - Median score: 3 A large majority of respondents disagreed with the statement The existing regulatory structure provides sufficient constraint on Royal Mail's market power - Median score: 2 Respondents disagreed almost unanimously. 4

5 1.2.6 The existing regulatory structure ensures Royal Mail's terms and conditions are fair and reasonable - Median score: 2.5 Again, almost all members responding disagreed. 1.3 Members were asked to give their reasons for the score given to these questions. Comments related to market conditions now being different to those in 2012 (when the present regulations were established) and concerns about issues such as RM s pricing and non-pricing behaviour, market uncertainty and dominant position. For example: The existing regime was established in 2012, when market conditions and RM's financial position was very different from now. RM's financial position is much improved. Ofcom has determined (last year, when large-scale final delivery competition was likely) that the USO is not under threat and the prospect of significant final delivery competition has all but gone. Also, RM has demonstrated an intent to misuse its dominance in final delivery. I am extremely concerned about the Missorts and Missreads that are now appearing as a result of Mail Mark. Once again, Royal Mail has appointed itself as Judge, Jury and Executioner and it appears they are able to invoice us for the above with no evidence whatsoever. Mailmark is costing us more than the 1% discount and we appear to be in another reversion situation. Lots of examples of unreasonable behaviour: Reversions, Contract terms e.g. meeting contract forecasting standards not viable & is not enforced only by virtue of RM goodwill; Mailmark penalties; Higher quality - SLAs have been unchanged for years; Pricing freedom - consistently above inflation price rises, on top of the two large increases. Difficult to see efficiencies coming through especially with the generous Union deal. Royal Mail continues to behave like a monopolist. Competitors need protection against discriminatory and targeted behaviour by Royal Mail. Otherwise Ofcom needs to regulate Royal Mail's business directly and comprehensively. In the last 5 years, Royal Mail have significantly increased postage prices over the expected RPI increases, certain business sectors have used these increases to drive business cases to remove post as an option from there communication channels. Royal Mail is a monopoly and will continue to 'force' their T&C's onto users in the access/retail market 1.4 One member expressed the view that: Ofcom's role is to protect the universal service. By having uncertainty in the market as there currently is with the announcement of this review only adds to uncertainty. Ofcom seem to have also set themselves up as the arbiter of RM efficiency, yet it is unknown what these efficiency parameters are. In simple terms I would guess that this would be to reduce fixed overhead, yet RM is legally responsible to its shareholders and they will make sure that RM are efficient - not Ofcom. Finally Ofcom suggested that they would be a 'light touch' regulator; we now seem to be descending into a repeat of the RM/Postcomm relationship, which benefited no one. 5

6 2. CONSTRAINTS ON ROYAL MAIL Ofcom Question 2: To what extent do you consider Royal Mail's pricing and nonpricing behaviour is constrained by other postal operators and additional factors such as e-substitution? 2.1 MUA members generally believe other postal operators activities and additional factors such as e-substitution act as a constraint on Royal Mail s pricing and non-pricing behaviour to only some/or a small extent. 2.2 Members were asked about how they saw these constraints acting on RM s behaviours and typical comments are given below: (a) Examples (if any) of how Royal Mail s pricing behaviour is constrained by other operators. With Whistl having withdrawn from final delivery, there is very limited constraint on RM's pricing behaviour from other operators - except for bulk contract mail where access-based operators do exert some pressure on RM retail pricing. However, such pressure is determined by the access price (which is itself uncontrolled) and the 'margin squeeze' provisions on RM's retail pricing seem too lax and general. While other operators can exert competitive pressure on RM's retail pricing, such competition is based only on the 'above access' element of price. Only by combining resources (MUA, WAG, MCF, DMA etc.) has some pressure being put on RM to change behaviours RM continue to be dominated by Operations - e.g. Mailmark design. A far better solution would have been possible if Industry was involved in the design rather than at the last stages. Meter prices constrained by competition from other operators with own delivery and/or using DSA. Parcel prices constrained by other parcel operators. (b) Examples (if any) of how Royal Mail s pricing behaviour is constrained by e- substitution and other factors. If RM was constrained it would be trying to compete rather than maximise revenue. The 'sale' they did at the beginning of the year was a complete joke and was of no benefit to 'loyal' Royal Mail customers. How do you prove, when you mail 60 million items a year, that you are mailing a new group of customers. E-substitution affects postal pricing in general, not just RM pricing behaviour. While such pressure is significant, in particular for transactional mail (and publishing?), it is arguable that RM's pricing behaviour since 2012 has contributed noticeably to the decline in mail volumes. RM does not seem to offer many (if any) of the price flexibility and options which are often offered by other communications media (e.g. prices varying by day of week or time of year, 'spot pricing' or sectoral discounts). The sudden & large prices simply drove large transactional mailers to look at online solutions and arguably just accelerated the downturn in transactional mail. Belatedly they are trying to bring back some incentives but not on the Transactional side as yet. Separate pricing for advertising mail suggests that Royal Mail needs to price differently where price elasticity is affected by e-substitutes. 6

7 I don't believe they are constrained. RM is not incentivising customers to use mail over other channels. Price increases are accelerating e-substitution (c) Examples (if any) of how Royal Mail s non-pricing behaviour is constrained by other operators. RM effectively controls non-price behaviour of other operators, rather than RM's behaviour being constrained by other operators. The stringent requirements of RM access terms essentially feed through into the non-price behaviour of other operators and there is little opportunity for other operators to differentiate with RM on non-price terms. RM also differentiates between its retail and access non-price terms. It also seems that RM, unconstrained by other operators, has been able to push costs 'up-stream' from itself onto mail users and mail producers (e.g. Mailmark) Following the recent RMW consultation on proposed Contract changes, they backed down on most items - industry was pretty united against them. Demonstrates how out of touch they were. (d) Examples (if any) of how Royal Mail s non-pricing behaviour is constrained by e-substitution and other factors. RM's non-price behaviour seems unconstrained by e-substitution and other factors. Not convinced there are any real constraints on non pricing behaviour - they remain dominated by (unfounded) operational & commercial concerns. 2.3 MUA members were asked to score, using a scale of 1 None to 10 Severe, the effectiveness of the constraints on RM s pricing and non-pricing behaviours: Other operators' activities on Royal Mail's pricing? - Median score: 3.5 A large majority of respondents considered other operator s activities had little or no effect on Royal Mail s non-pricing behaviour. E-substitution and other factors on Royal Mail s non-pricing behaviour? - Median score: 3.5 Opinion amongst members was more evenly spread across the spectrum. Other operators activities on Royal Mail s pricing? - Median score: 2.5 The majority of respondents believed other operators activities had little or no effect on Royal Mail s pricing behaviour. 7

8 E-substitution and other factors on Royal Mail s pricing? - Median score: 3.5 Members opinions were a reasonably even spread across the spectrum 2.4 Members were asked if, overall, they believed further regulatory constraint was required for - RM s Retail pricing - RM s Retail non-pricing terms - RM s Access pricing - RM s Access non-pricing terms - In each case all but one responded agreed that further regulatory constraint was needed. 2.5 Asked about what type of constraint could be applied, typical responses included: For Royal Mail's retail pricing? Needs to reflect the market conditions, annually and a minimum of 3 months notice. Needs to be more clearly, explicitly and specifically constrained - not in absolute level but in relation to access pricing and RM costs, to better protect against 'margin squeeze' and highly-targeted price competition (which seems at times to be inconsistent with existing regulations). RM should be required to make price offers to both access and retail customers at the same time and on the same (or very similar) terms Equivalence model has many merits i.e. Retail have access to Operations on same terms as DSA providers. Every product has to be designed & be available in both wholesale & retail markets (as per telecoms market) Publication of bulk mail rates would provide transparency and allow identification of anti-competitive activity. Retail prices should be explicitly based on underlying access prices.rm should only allow to increase prices in line with RPI For Royal Mail's retail non-pricing terms? Ts&Cs need to be fair and reasonable. Any invoices, additional to the 'price' must be accompanied by management information Should not be constrained in themselves, but in relation to access non-price terms (with greater equivalence between retail and access non-price terms). Non-price terms should not be a means to push costs up-stream onto other parts of the supply chain or customers in place of sufficient RM efficiency improvement Limit frequency of changes. Royal Mail should provide an access equivalent for all bulk mail products. For Royal Mail's access pricing? Access pricing should be subject to some form of regulatory constraint that ensures RM strives for efficiency and is limited in the scale of real price increases and frequency of price increases. Such constraints on access prices should feed through into RM's retail pricing, by the mechanism of other operators competing for retail business through 'access plus' pricing 8

9 RPI-X type control linked to point to point headroom controls. Only one tariff increase in a 12 month period. Not being allowed to apply tariff increases just to increase revenues For Royal Mail's access non-pricing terms? There should be greater obligation on RM to ensure its access and retail non-price terms are as equivalent as possible (recognising there are some operational differences and practicalities). For example, RM should be required to offer an access equivalent for all retail services. 2.6 Scope of Access Regulation Members were asked if the current regulatory regime (requiring Royal Mail to offer access services for Letters and Large Letters, for insertion at Inward Mail Centres and to provide D+2 (or later) services) should be extended A large majority of respondents agreed Members comments typically expressed views that the scope of access regulation should be extended to include - Items above the current level of 750g (i.e. to include Packets ) - Any features offered on RM Retail services (e.g. tracking / Proof of Delivery) - Extraction of items at Outward Mail Centres - D+1 services ( Premium Access ) - PO Boxes - Business Reply services 2.7 Similarity of Retail and Access Members were asked about how they saw the similarity of RM s Retail and Access services Respondents almost unanimously did not believe the service specifications, additional features and pricing options / promotions offered by Royal Mail to its Retail and Access customers are sufficiently similar. Comments made included: Short term price offers and other incentives are often different for access and retail, or at different times. Retail offers features (such as tracking and guarantees/insurance) not available for access. Retail provision of containers etc. is more flexible than for access. Retail forecasting requirements are less stringent than for access. TMI, Business Response services should be totally replicated. Some retail offerings end up being below DSA prices - this cannot be right. There should always be direct linkage between retail services and equivalent access services. Incentives offered on retail services should be reflected directly in retail services. Volume related discounts. Term contracts. Less controls e.g. Forecasting Royal Mail Retail should be subject to the same or similar terms and conditions as Access customers. 9

10 3 COMPETITIVE CONSTRAINTS Ofcom Question 3: To what extent do the competitive constraints faced by Royal Mail vary by different types of mail, e.g. for letter services, between advertising mail, transactional mail and publishing mail; and for parcel services, between single-piece and bulk parcels? 3.1 MUA members were asked to score on a scale of 1 (None) to 10 (Severe) the extent of competitive constraints faced by Royal Mail in different types of mail and parcels: a) Advertising Mail: Median score: 3 Almost two-thirds of scores fell within the 1-3. b) Transactional Mail Median score: 3.5 The large majority of members believe the competitive constraints faced by Royal Mail in the transactional mail arena were negligible. c) Publishing Mail Median score: 3 A majority of respondents believed Royal Mail faced little competitive pressure in the publishing mail market. d) Single Item Parcels Median score: 7.5 There was an even spread across the spectrum with regards to single item parcels. e) Bulk Parcels Median score: 8 A large number of members believed the competitive constraints in bulk parcel delivery mail for Royal Mail were severe. 3.2 Members were asked to give examples of the competitive constraints faced by Royal Mail in each case and those mentioned typically included: Advertising Mail and Publishing Mail On-line and e-delivery (e-substitution) Local door drop (unaddressed items) The Wholesale channel offers these products services for letters and large letters There are competitive constraints on RM from other advertising media, but not from other postal services. Transactional Mail E-substitution (though there was a view this was still developing) There is severe competition to RM from e-communications (though RM's pricing behaviour has arguably not recognised that constraint), but only to a limited extent from other postal services. Single Item Parcels. Growth in other carriers with local collection points. 10

11 Competition for single item parcels has increased, largely aimed at the C2X market, but RM retains strong market position (especially for 'one-off' single parcels). Appears to be thriving commercial market. None. (Limited competition from consolidators such as Parcel Monkey.) Highly competitive market. Bulk Parcels. Other national carriers Competition is strong for bulk parcel contracts, but RM retains more market power at lower weights (below 1.5-2kg?) and there are reports of RM using that market power to compete aggressively were there is one item price across a wider weight band. Appears to be thriving commercial market Yodel and Hermes. 4 ROYAL MAIL EFFICIENCY IMPROVEMENT Ofcom Question 4: Do you consider that Royal Mail faces appropriate incentives to deliver efficiency improvements? 4.1 Members were asked if they considered that Royal Mail faces appropriate incentives to deliver efficiency improvements. Respondents almost unanimously considered Royal Mail faces little or no incentives to deliver efficiency improvements. Typical comments included: Little or no. Their only incentive is to deliver value to the shareholders and they can do this by price rises and not efficiency improvements The extent to which RM does face competition from non-postal communications does provide some efficiency improvement. RM should face increasing spur to efficiency from stakeholder pressure (seeking improved dividend returns and capital gains ) Only via Ofcom as far as I can see - RM can continue to put up process to mask inefficiencies Competition in parcel sector. With little or no competition there is no incentive for RM to delivery efficiency improvements One member said: This incentive will come from the shareholders - it doesn't need a regulator to monitor or dictate efficiency improvements 4.2 Members were asked what other incentives should / could Royal Mail face to deliver efficiency improvements. Typical responses included: They should be given cost per letter processed targets to hit. In the absence of effective direct postal competition and having shown both a poor past record of efficiency improvement and potential for better efficiency, some form of regulatory requirement for efficiency improvement is required 11

12 Ofcom activity - fines etc although RM has never had any good track record of taking costs out even with Postcomm s RPI-X Price control to reduce access prices. Greater competition 5 REMOVAL OF EXISTING CONTROLS ON ROYAL MAIL ACTIVITY Ofcom Question 5: Do you consider that there are any areas of existing controls on Royal Mail activity where there is the potential for deregulation? 5.1 The large majority of members who responded said they did not know; a quarter said there were no areas for potential de-regulation on Royal Mail. 6 OTHER COMMENTS Ofcom Question 6: Do you have any further comments or views about Ofcom's regulation of Royal Mail? 6.1 Members responses included the following comments: The existing regime is not fit for purpose and has focussed in the past too much on ensuring USO provision, rather than on furthering the interests of consumers and ensuring USO provision is efficient. Ofcom's December 2014 proposals were too limited to protect the potential for development of final delivery competition, and did not address the needs of customers generally. While necessary, they were not sufficient. RM continues to demonstrate monopoly behaviour in one form or another and top management culture appears to be outright monopolistic. Ofcom need to be far more proactive & quicker to intervene Ofcom's strategy has been to rely on competition as the main regulatory lever but Ofcom's failure to promote and protect competition has resulted in this lever breaking and being ineffective. In the short term Ofcom now needs to impose comprehensive regulatory controls on Royal Mail whilst still promoting competition that is a more effective form of long term regulation. One member saw potential problems in the relationship between Ofcom and Royal Mail: I can only see deterioration in the relationship between RM and Ofcom and eventually will be similar to the old Postcomm/RM relationship which was bad for the market and bad for the industry. 12

13 7 MAJOR CUSTOMER PERCEPTIONS OF ROYAL MAIL 7.1 Members were given a series of statements about how Royal Mail was perceived by major customers and asked to say to what extent they agreed with each statement, on a scale of 1 Fully Disagree 10 Fully Agee. 7.2 The results are shown in the table below: QUESTION MEDIAN SCORE Listens to its customers 3 Scores were generally low Puts its customers first 3.5 Expects customers to do too much in order to improve Royal Mail's efficiency 8 Is a trusted business partner 4.5 Is one of the easiest business partners to work with 3 Scores were all low Dictates its requirements to the market 9 Is flexible to customer needs 3 Is much like any other business partner 2 Scores were generally low Still has a monopolist mentality 9 Scores were generally high Has successfully changed its approach to serving customers 3 Scores were consistently low Treats us as if we don't have any choice 5.5 Uses regulation as an excuse for not responding to our needs 7 Scores were generally high Unreasonably exploits its power to increase prices 8.5 Fails to develop products that meet our requirements 7 Fails to develop process and procedures that meet our requirements 8 Scores were generally high 1 Fully Disagree 10 Fully Agee. 13